Business Law and the Regulation of Business Chapter 39: Bankruptcy By Richard A. Mann & Barry S. Roberts

Topics Covered in this Chapter I. Federal Bankruptcy Law I. Federal Bankruptcy Law A. Case Administration-Chapter 3 B. Creditors, the Debtor, and the C. Liquidation–Chapter 7 D. Reorganization–Chapter 11 E. Adjustment of Debts of Family Farmer-Ch. 12 F. Adjustment of Debts of Individuals-Ch. 13 II.Creditors' Rights & Debtors’ Relief Outside of Bankruptcy II.Creditors' Rights & Debtors’ Relief Outside of Bankruptcy A. Creditors' Rights B. Debtor's Relief

Case Administration– Ch. 3 n Commencement of the Case - the filing of a voluntary or involuntary petition begins jurisdiction of the bankruptcy court. –Voluntary Petitions - available to any debtor even if solvent. –Involuntary Petitions - may be filed only under Chapter 7 or 11 if the debtor is generally not paying his debts as they become due.

Case Administration n Dismissal - the court may dismiss a case for cause after notice and a hearing; under Chapters 12 and 13 the debtor has an absolute right to have his case dismissed. n Automatic Stay - prevents attempts by creditors to recover claims against the debtor. n Trustee - responsible for collecting, liquidating, and distributing the debtor's estate. n Meeting of Creditors - debtor must appear and submit to an examination of her financial situation.

Creditors, the Debtor, and the Estate—Ch. 5 n Creditor - any entity that has a claim against the debtor. n Claim - a right to payment. –Secured Claim - claim with a lien on property of the debtor. –Unsecured Claim - portion of a claim that exceeds the value of any property securing that claim. n Priority of Claims - the right of certain claims to be paid before claims of lesser rank.

Debtors n Debtor's Duties - the debtor must file specified information, cooperate with the trustee, and surrender all property of the estate. n Debtor's Exemptions - determined by State or Federal law, depending upon the State. n Discharge - relief from liability for all debts except those the Bankruptcy Code specifies as not dischargeable.

The Estate n All legal and equitable interests of the debtor in nonexempt property.

Trustee as Lien Creditor n Trustee gains the rights and powers of creditor with judicial lien (an interest in property, obtained by court action, to secure payment of a debt).

Voidable Preferences n Bankruptcy Code invalidates certain preferential transfers made before the date of bankruptcy from the debtor to favored creditors.

Fraudulent Transfers n Trustee may avoid fraudulent transfers made on or within one year before the date of bankruptcy.

Statutory Liens n Trustee may avoid statutory liens which first become effective on insolvency, are not perfected at commencement of case, or are for rent.

Proceedings n Distribution of the Estate - in this order: (1)­secured creditors, (2)­creditors entitled to a priority, (3)­unsecured creditors, and (4)­the debtor. n Discharge - granted by the court unless the debtor has committed an offense under the Bankruptcy Code or has received a discharge within six years.

Reorganization—Chapter 11 n Purpose - to preserve a distressed entity and its value as a going concern. n Proceedings - debtor usually remains in possession of the property of the estate.

Plan n Acceptance of Plan -requires a specified proportion of creditors to approve the plan. n Confirmation of Plan - requires (1)­ good faith, (2)­feasibility, (3)­cash payments to some creditors, and usually (4)­acceptance by creditors. n Effect of Confirmation - binds debtor and creditors and discharges the debtor.

Adjustment of Debts of a Family Farmer—Ch. 12 n Purpose - to permit a family farmer to file a repayment plan that will discharge him from most debts. n Proceedings - available to a farmer who receives at least 50 percent of his income from farming and who meets certain debt limitations. n Confirmation of Plan - same as a Chap. 13. n Discharge - after a debtor completes all payments under the plan.

Adjustment of Debts of Individuals—Ch. 13 n Purpose - to permit an individual debtor to file a repayment plan to discharge most debts. n Confirmation of Plan - requires (1) good faith, (2) that the value of property distributed to creditors be not less than the amount that would be paid them under Chapter 7, (3) that secured creditors accept the plan, and (4) that the debtor be able to make all payments and comply with the plan. n Discharge - after a debtor completes all payments under the plan.

Comparison of Bankruptcy Proceedings

Collection and Distribution of the Debtor’s Estate All of debtor’s nonexempt property Voidable preferences Fraudulent transfers Debtor’s Estate Administered by Trustee Secured creditors Creditors with priority Unsecured creditors who file claims on time Unsecured creditors who file claims tardily Debtor receives remaining assets Statutory liens Property subject to trustee’s right as a lien creditor

Creditors' Rights Outside of Bankruptcy n Prejudgment Remedies - include attachment and garnishment. n Postjudgment Remedies - include writ of execution and garnishment.

Debtor's Relief Outside of Bankruptcy n Compositions - agreement between debtor and two or more of her creditors that each will take a portion of his claim as full payment. n Assignment for Benefit of Creditors - voluntary transfer by the debtor of some or all of his property to a trustee, who applies the property to the payment of all the debtor's debts.

Debtor's Relief Outside of Bankruptcy n Statutory Assignment - provides a voluntary release of balance of claims from creditors who accept partial payments made by the trustee for the debtor. n Equity Receivership - receiver is a disinterested person appointed by the court to collect and preserve the debtor's assets and income and to dispose of them at the direction of the court.

Bankruptcy Filings % 1% 0.1% 29% Chapter 7 Chapter 11Chapter 12Chapter 13 Source: Administrative Office of the U.S. Courts, 1997.